--Data increase expectations there will be no rate rise before late 2013

(Adds more detail and background throughout, comment from economists beginning in the fifth paragraph.)

By Rebecca Howard
Of

WELLINGTON--New Zealand's consumer price index rose in the third quarter but annual inflation was below the bottom end of the Reserve Bank of New Zealand's target range, data released Tuesday showed, increasing expectations that the central bank won't raise the Official Cash Rate until late 2013 at the earliest.

Statistics New Zealand said the consumer price index rose 0.3% on the quarter in the three months ended Sept. 30, following a 0.3% rise in the second quarter. The index was up 0.8% on the year.

The New Zealand dollar weakened following the data, and was trading at US$0.8167 at 0015 GMT from US$0.8185 prior to the release.

The Reserve Bank of New Zealand's new Policy Targets Agreement, signed between RBNZ Governor Graeme Wheeler and Finance Minister Bill English, requires the central bank to focus on keeping future average inflation near 2% and within a 1% to 3% target band.

ASB Bank is among those expecting the RBNZ to wait until September 2013 to raise the OCR, pushing the date out from its prior view of June.

"The muted 3Q inflation outcome, coupled with the slow pace of eurozone crisis resolution, coupled with dim eurozone growth prospects, and likelihood of further RBNZ caution over persistent NZD strength all argue for a much later start than June," ASB Economist Jane Turner said in a note.

The Official Cash Rate is currently at 2.5%.

While economists agree a rate cut is possible, in particular given the tepid inflationary pressures, they say the hurdle is high. "A cut would require evidence of a sustained weakening in medium-term inflationary pressure. This would need to be corroborated in activity, labor market and inflation expectations angles," said ANZ Bank in a note.

Chris Green, economics and strategy director at First NZ Capital, said the weaker-than-projected inflation figures, together with a backdrop of subdued inflation expectations and a moderate recovery profile "can be expected to reinforce the RBNZ's comfort with the maintenance of stimulatory interest rate settings and increases the prospect of the RBNZ lowering rates were the global growth backdrop to deteriorate."

He retains his expectation that the RBNZ will wait until the second half of 2013 at the earliest before raising the OCR, but said in a note "the prospect of unchanged rates for the whole of 2013 has now clearly increased."

The September CPI increases were below rises of 0.5% on the quarter and 1.0% on the year expected by a Wall Street Journal poll of 14 economists and by the Reserve Bank.

Statistics New Zealand said the 0.8% increase in the year to September was the smallest annual rise since a 0.5% increase in the year to the December 1999 quarter.

The "10% trimmed mean" CPI measure, which strips out extreme rises and falls in prices of individual items in the CPI basket, rose 0.1% on the quarter in the third quarter and was up 1.1% on the year, using the June 2011 quarter weightings.

On the quarter, the increase in the CPI was due to higher housing-related prices and seasonally higher vegetable prices, offset by cheaper transport, telecommunication services and fresh milk, Statistics New Zealand's prices manager, Chris Pike, said.

While inflation pressures are currently low, economists warn about potential inflation linked to the housing and building market during the post-earthquake rebuild of Christchurch in the Canterbury region.

Statistics New Zealand said rental property prices were up 2.4% on the year, while prices for the purchase of newly built houses rose 3.0%. In the Canterbury region, prices for the purchase of newly built houses were up 9.6% on the year.

Housing-related inflation "is starting to accelerate," said Westpac Chief Economist Dominick Stephens in a note. "Our concern is that the Canterbury rebuild will boost housing-related inflation, eventually forcing the Reserve Bank to increase the OCR. This story still looks very much on track."